June 7 (Bloomberg) -- Japanese Prime Minister Naoto Kan’s
policies to contain a record public debt and prevent the yen’s
surge may help the nation avert a selloff of bonds and stocks,
according to Daiwa Institute of Research Ltd.

The new administration is focused on restraining
government spending, raising taxes, easing monetary policy and
preventing the yen’s advance, said Junichi Makino, a senior
economist at Daiwa Research in Tokyo. Kan’s policies are a
“complete reversal” from those advocated by his Democratic
Party of Japan in its election pledge and “the market will
like his flexibility and quickness to change sides.”

With the market focused on budget deficits and sovereign
risks, Japan is “stripped naked” with large amounts of public
debt and little room left for monetary easing, Makino said. The
government “may trigger ‘Japan selling,’ unless it shows its
commitment to controlling its spending and raising the
consumption tax to about 20 percent.”

Japan’s public debt is 180 percent of gross domestic
product, the worst among members of the Organization for
Economic Cooperation and Development. Prospects are shrinking
that domestic savings will help absorb the nation’s record debt.

Public debt totaled 882.9 trillion yen ($9.7 trillion)
as of March 31, up 4.3 percent from a year earlier, according
to the Ministry of Finance. The government plans to compile a
medium-term fiscal framework and a strategy to rebuild its
finances by the end of this month.

Members of Kan’s new cabinet will likely help prevent
Japan selling, said Tomoko Fujii, a senior foreign-exchange
strategist at Bank of America Merrill Lynch. “His key economic
ministers are likely to agree on rebuilding government finances,
while the cabinet of the former Prime Minister Yukio Hatoyama
tended to favor increasing debt issuances.”

The new administration may pressure the Bank of Japan to
ease monetary policy to prevent the yen’s appreciation, Fujii
said. A policy mix of fiscal austerity, monetary easing and a
weaker yen is similar to a strategy used by the former Prime
Minister Junichiro Koizumi, she said.